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Monthly Market Review - July 2021

Updated: Mar 8, 2022

In this note, we look at a supply squeeze that occurred in July and quantify the quieter market overall. Pricewise, July had more range-bounded price action for Bitcoin and Ethereum. Most of the month was sideways consolidation in an even tighter price bound than June. Bitcoin spent most of the month between $35,907 and $29,708 and only broke higher on July 26. Ethereum followed a similar pattern.

Overall, the late rise in July has been attributed to a ‘supply squeeze’ by pundits. The squeeze was caused by a substantial accumulation of Bitcoin by long term holders, thus reducing supply and increasing price. During July, analysts detected a few indicators of a supply squeeze. Namely:

  1. A strong outflow of Bitcoin from exchanges and OTC desks to private wallets. An outflow usually indicates an accumulation of long-term holders.

  2. A selling by recently moved or created Bitcoin. For this, analysts examine what Bitcoin is being sold and can determine that the average Bitcoin being sold is heavily skewed towards Bitcoin that has only been held for a short time. There is an assumption that recent market participants hold onto their Bitcoin for less time.

  3. Miners, who produce new Bitcoin, are not the cause of the selling. Instead, they are retaining the Bitcoin they create at an increasing rate.

The above facts contributed to a supply squeeze that started in earnest on July 26, where over USD 110m of shorts were liquidated in a few minutes. These liquidations drove the price up to over $38,000 - before it eventually climbed to $40,000 by the end of the month.

It appears that this is still a spot-driven recovery. Funding rates have remained negative towards the end of July, meaning short-term futures contracts remained in backwardation (i.e. the near term future price remains below the current price), even as the fast rise in price liquidated many short traders. Overall, spot-driven rallies are considered more healthy than highly leveraged rallies as the growth is more organic.

Despite the late rally, July was the quietest market of 2021. The trading volume of both spot exchanges and derivatives continued to fall sharply. Both are down ± 30% compared to June, which was the previous slowest month. The graph below shows the volume traded on spot exchange per month.

During July, the overall market appears to have transitioned to a moderately bullish consolidation period. It has recovered from its sharp fall in May, and it is now rising after bottoming in the middle of July. This rise is despite the lower liquidity and minimal derivative trading impact.


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